Just because you give it away you can’t hit 5 million customers

There is a widely popular post showing up in my LinkedIn and Twitter timelines. It is from Ryan Holmes, CEO of Hootsuite. Ryan calls the post, “How to get 5 million customers zero Ad budget” and goes to give the first tip to get there,

Give it away for free: Freemium users first; monetization later.

In 2008, we offered HootSuite to the world as a freemium product. The overwhelming majority of users—and we very quickly had hundreds of thousands of them—paid absolutely nothing for the service. Companies who wanted beefed up functionality and extra support paid a monthly fee, from as little as $10 to $1,000 and up.

And he goes on to extol the virtues of freemium, how free users are lead generators and finally ends with,

The basic premise is simple, yet deceptively powerful: Put your energies into developing an irresistible product and loyal user base. Worry about making money later. I can’t imagine doing business any other way.

Is it that simple?

First let us look at the word customers and distinguish the term from users (or even free loaders). I did this a while back in my user mapping. If they are not paying money they are not customers. That distinction is lost in Ryan’s post. The 5 million are just users of which likely 3% are customers (going by base rate).

Second let us not forget the opportunity cost – how many of those free users would have paid for the premium version had there not been a free version. I explain this point in more detail here. Let us not overlook the fact that a business could have uncovered demand in other ways and could have targeted only those with a product they value.

Third, Ryan writes a general advice column for everyone based on the success of his business. It is not that different from your sports fan friend telling you how he picked Connecticut and Kentucky for the NCAA final. Just because Hootsuite succeeded by signing up 5 million users do not think you will too by giving away your product for free. Let us say you and 999 others take his advice at face value, can those 1000 people who retweeted his post start a company and reach 5 million customers users? By the time 10th such startup succeeds will the previous 9 still retain their 5 million?

Fourth, Ryan quotes the same usual suspects of freemium suspect – Dropbox and Evernote. Let us not overlook the fact that Dropbox now makes almost all of its revenue from its business customers.

“We are now seeing the end of the freemium model — signing up users for free and trying to upsell,” said Christian Vanek, CEO of the Boulder-basedSurveyGizmo, in a recent phone conversation.

“6.5 million unique users is not all that it’s cracked up to be. I don’t want hits. I want revenue. I want a real business,” said Matt Wensing, founder and CEO of Riskpulse, in an interview withMixergy.

“Make a product people want to pay for,” said Marco Arment, founder of Instapaper, in a Planet Money interview.

It is comforting to think all you have to do is build a product, give it away for free, sign up 5 million users and see 3-5% of them converting to paid users. It is not that simple. It is in fact simplistic, like the advice from your friend who picked the NCAA bracket (when millions were filled out).

This is a product centric view that assumes the world is the target market. There is nothing simple about reaching 5 million paid customers. But there is a way that is more likely to get you there – by finding a segment larger than 5 million with a pressing need that is not met by any alternatives and are willing to pay for a product that fills the need.